Companies planning to raise money from primary market will have to tread cautiously if the provisions of the proposed Companies Bill, 2008 are implemented in letter and spirit.

The Bill that is to replace the existing Companies Act, 1956, while proposing a more effective regime for inspections and investigations, lays down the maximum as well as minimum quantum of penalty for offences like mis-statement of facts in the prospectus or fraudulently luring investors through false claims during the time of initial public offer (IPO).

Mis-statement in prospectus will attract a maximum of three year imprisonment plus a maximum of Rs 25 lakh fine and it will be non-compoundable

Fraudulently luring persons during the time of IPO would attract three year imprisonment plus a minimum fine of Rs 1 lakh or a maximum of Rs 50 lakh

A Ministry for Corporate Affairs official said, “The Bill seeks to lay down the maximum as well as minimum quantum of penalty for each offence besides civil consequences in the form of damages. While in the existing Act the number of non-compoundable offences is limited to 3-4, in the proposed Bill, the number of non-compoundable offences has been increased.”

For example, in the existing Act, mis-statement in prospectus attracts two year imprisonment or Rs 50,000 fine or both and is compoundable. In the Bill, it has been proposed that such an offence will attract a maximum of three year imprisonment plus a maximum of Rs 25 lakh fine and it will be non-compoundable.

In case a company is found fraudulently luring persons during the time of IPO, such a company/official would attract three year imprisonment plus a minimum fine of Rs 1 lakh or a maximum of Rs 50 lakh.

Besides, such an offence will be non-compoundable. Under the existing Act, the offence attracted a fine of Rs 1 lakh and the offence is compoundable

In case of repeated offence – that is second or subsequent offences – the amount of fine imposed will be twice the amount of the fine levied at the time of first offence. In case of fraudulent activities/actions, provisions for recovery and disgorgement have been included.